Investing Mistake No. 5: Turning A Stock Into A Pet

We all know how a devoted owner treats a dog. The dog is a member of the family. If the dog dirties the carpet, then certainly you should apologize to the dog for not taking him or her out sooner. If the dog gets sick, it's off to the vet. And sometimes the dog gets a special treat just for being himself or herself.

Man's best friend gets better treatment, and is provided with more excuses, than many people would allow for their in-laws.

This brings us to No. 5 of the 12 biggest investing mistakes in this current informal series in Investor's Corner: Some investors turn their stocks into household pets.

They'd be better off if they treated their stocks as if they were in-laws: Yes, do come, but when it's time, please leave.

How can an investor avoid the pet-stock trap?

Before we answer that, let's acknowledge that some cold-hearted people don't have that problem. Experts on psychopathy say that not all psychopaths become criminals. Some become CEOs, lawyers, politicians or even money managers.

A psychopathic money manager would be ideal, never showing emotional favoritism whether it's time to exit with a profit, or choke off an entire losing position. For the rest of humanity, though, growing attached to a stock is a potential problem.

So let's return to our original question: How can you avoid the pet-stock trap? Here are seven ways.

• Be aware of what you love: If you like Apple's (AAPL) computers and devices, or Urban Outfitters' (URBN) clothes, or Smith & Wesson's (SWHC) firearms, owning the stock can be like hanging out with a friend. We're not suggesting you avoid buying a stock for that reason, just be aware of your natural loyalties. A company won't show up at your funeral, so why treat it like a friend?

• Avoid the stray-dog stocks: This takes the pet-stock impulse to a new high. Or is it a low? Taking a troubled stock into your portfolio because the market has beaten it up "unfairly" is a recipe for losing money.

• Take profits regularly: If you are prone to make a stock a pet, gain the discipline to sell on the way up. Instead of becoming convinced that your stock will grow into a huge winner, sell shares when the stock reaches a 20% to 25% profit level, or less in a tough market. You can always buy the stock back if it forms and breaks out of a new and proper base.

• There are no psychiatrists for stocks: Yes, there are psychiatrists for dogs, mostly it seems in California, but there are no anger-management sessions for mean stocks. No matter how much you care, the stock will do what it wants to do.

• Try a blind test with a savvy investor: This involves writing down the key numbers on a handful of stocks, including your pet stock. Without revealing the names of the stocks, let a successful investor look at the data and pick the best. If your pet doesn't have the numbers, sell it.

• There are no bad dogs, but there are bad stocks: A savvy dog whisperer can win over a misunderstood pit bull, but there are no stock whisperers who can make a stock change its ways.

• If you can't stay detached, try an ETF. Advertising can humanize a company and, by default, its stock. But exchange traded funds are less likely to have that problem.

Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the stocks they discuss. The information and content are subject to change without notice.